Legacy Branches Will Burden Indian Banks Amid Fintech Competition

Key Takeaways

• Slow digital transformation and dependence on costly deposits limit revenue growth and profitability as tech-savvy competitors gain ground.
  
• Small scale and rising regulatory costs restrict RBL Bank's ability to invest in technology, further squeezing margins and shareholder returns.
  
• Expansion in retail banking, digital investment, improved risk management, and revenue diversification are strengthening long-term profitability and reducing reliance on volatile income sources.

Catalysts

Operates as a scheduled commercial bank in India.

• The accelerating shift of Indian consumers to digital-only, experience-driven financial services leaves RBL Bank vulnerable, as its significant investment in physical branches and relatively slow digital transformation may result in stagnant deposit growth, diminishing its long-term revenue base.
  
• The rapid rise of nimble fintechs and large tech entrants is likely to erode RBL Bank's market share and profitability, particularly in payments and lending, as new competitors offer lower-cost, more innovative products, leading to structural net margin compression.
  
• Persistent weakness in RBL Bank's liability franchise and ongoing reliance on high-cost deposits will continue to elevate its funding costs, making it difficult for the bank to improve net interest margins even as it attempts to shift its deposit mix; this drags down both earnings and profitability metrics.
  
• RBL Bank's small size and limited scale relative to larger private sector peers restricts its ability to achieve operating leverage or invest at scale in required technology upgrades, resulting in higher ongoing IT and compliance costs that pressure net margins and cost-to-income ratios.
  
• The expected tightening of regulatory capital requirements and mounting ESG scrutiny will force RBL Bank to maintain higher capital buffers and incur additional compliance expenditures, which in turn dilutes shareholder returns and limits growth in earnings per share over the medium to long term.

RBL Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on RBL Bank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming RBL Bank's revenue will grow by 21.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.0% today to 13.6% in 3 years time.
• The bearish analysts expect earnings to reach ₹17.9 billion (and earnings per share of ₹29.33) by about July 2028, up from ₹5.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.2x on those 2028 earnings, down from 27.2x today. This future PE is lower than the current PE for the IN Banks industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.58%, as per the Simply Wall St company report.

RBL Bank Future Earnings Per Share Growth

Risks

• RBL Bank has seen strong growth in granular retail deposits and secured retail lending, with management emphasizing continued expansion in Tier-2 and Tier-3 cities and leveraging branch networks, which could boost long-term revenue and profit growth.
  
• The bank is actively investing in digital initiatives, unified apps, and technology upgrades, which should reduce operational costs, improve customer engagement, and support higher net margins over time.
  
• Improvements in asset quality, disciplined risk management, and proactive provisioning-including contingent buffers and insurance schemes-are helping to stabilize credit costs and could support more consistent earnings.
  
• Management expects margins to recover from recent lows, with guidance towards a return to 4.8% net interest margin and 1% return on assets by the end of the fiscal year, which would enhance profitability and shareholder value.
  
• Ongoing efforts to diversify income streams through fee-based businesses, cross-selling, and fintech partnerships increase non-interest revenue opportunities, making RBL Bank less dependent on volatile interest spreads and positioning it for sustainable long-term earnings growth.

Valuation

• The assumed bearish price target for RBL Bank is ₹157.65, which represents two standard deviations below the consensus price target of ₹252.42. This valuation is based on what can be assumed as the expectations of RBL Bank's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹305.0, and the most bearish reporting a price target of just ₹140.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹131.2 billion, earnings will come to ₹17.9 billion, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹258.92, the bearish analyst price target of ₹157.65 is 64.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.